Yunhong Green CTI Ltd.'s (NASDAQ:YHGJ) 38% Price Boost Is Out Of Tune With Revenues

The Yunhong Green CTI Ltd. (NASDAQ:YHGJ) share price has done very well over the last month, posting an excellent gain of 38%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 47% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Yunhong Green CTI is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.2x, considering almost half the companies in the United States' Consumer Durables industry have P/S ratios below 0.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Yunhong Green CTI

What Does Yunhong Green CTI's P/S Mean For Shareholders?

Revenue has risen firmly for Yunhong Green CTI recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Yunhong Green CTI, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Yunhong Green CTI would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 6.1% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 5.8% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Yunhong Green CTI is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Yunhong Green CTI's P/S Mean For Investors?

Yunhong Green CTI shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Yunhong Green CTI currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 4 warning signs for Yunhong Green CTI (2 are a bit concerning!) that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.